Why the medical device tax needs to stay

The industry can't cite a single objective study that shows the medical device tax will suppress innovation and make U.S. manufacturers uncompetitive.

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Sen. Amy Klobuchar (D-Minn.)

Sen. Amy Klobuchar (D-Minn.), shown at an unrelated event in January, is spearheading a campaign to repeal the medical device excise tax. (Bennett Raglin / Getty Images for ELLE / January 20, 2013)

The chief drawback of a law as complex as the Affordable Care Act, the health insurance reform measure passed in 2010, is that it provides self-interested opponents a multitude of places to stick a wedge in and hammer away.

But you'd be hard-pressed to find a campaign against the ACA as narrow-minded and dishonest as the one mounted by medical device manufacturers.

This industry, which encompasses makers of everything from tongue depressors to MRI machines, has been grousing from the outset about an excise tax of 2.3% the act imposes on sales of its products. The levy was designed to generate about $30 billion over 10 years, starting this past Jan. 1, when it went into effect. Certain "devices" customarily provided directly to consumers at retail, such as eyeglasses, hearing aids, sterile bandages and wheelchairs, were exempted.

For reasons we'll get to in a moment, repeal of the medical device excise tax has been looked upon favorably on Capitol Hill far more than any other attack on the ACA. More interestingly, it's a bipartisan effort.

Spearheading the repeal campaign is Sen. Amy Klobuchar (D-Minn). A symbolic vote in the Senate last March passed 79 to 20, with 33 Democrats, most of whom are otherwise staunch supporters of the ACA and many of whom have otherwise impeccable progressive credentials, voting in the majority. Among them were Democratic Sens. Elizabeth Warren of Massachusetts and Al Franken of Minnesota.

But they're in the wrong. The medical device tax needs to stay put.

There were two ideas behind the tax. One was that the device industry, in general, was positioned to reap appreciably higher revenue from the act, which would add as many as 30 million Americans to the rolls of the medically insured while encouraging the use of technology to increase the efficiency of healthcare delivery.

The other was that Congress was under the gun to make the ACA "revenue-neutral," especially to the extent it improved access to care via the expansion of state Medicaid programs. Those costs were to be offset by taxes or cost reductions elsewhere, so the federal budget deficit could stand serenely unaffected.

As many people have discovered, this produced a melange of benefits and sacrifices that extend throughout the healthcare system. To pay for the ACA, Congress imposed new taxes on more generous "Cadillac-plan" health insurance policies, new annual fees on health insurers and pharmaceutical manufacturers, even a tax on indoor tanning services.

Medicare taxes paid by the wealthy were increased, and flexible spending plans, which reduce taxes for middle-class workers, pared back. Physicians and hospitals that serve Medicare patients will see their reimbursements reduced.

The medical device industry talks as though it's uniquely burdened by its share of these trade-offs. Its pitch is that the tax will destroy innovation in the industry, put small companies out of business, send thousands of jobs overseas and drive up costs for consumers. "This very targeted excise tax is going to lead to bad outcomes across the board," says JC Scott, the government affairs executive at the Advanced Medical Technology Assn., or AdvaMed.

Yet AdvaMed's claims have been subjected to outside analysis and found wanting. AdvaMed's claim that the excise tax would drive employment abroad is based on an analysis it commissioned from Diana and Harold Furchtgott-Roth, two free-market economists who assert rather than document the employment effect, and none too vigorously, at that. "Some manufacturing ... may shift offshore as a result of the new excise tax to minimize losses," they write, wanly.

Yet the logic here is questionable, since the tax is imposed on sales of devices in the U.S. no matter where they're produced, and devices produced in the U.S. are exempt if they're sold abroad. The authors' suggestion that companies might move jobs overseas to make foreign sales more profitable overlooks one over-arching fact about the medical device market: It's hugely dominated by the United States. In 2008, according to a Milken Institute report AdvaMed referred me to, the U.S. accounted for fully 41% of the industry's $210 billion in worldwide sales. No one else was close — second place belonged to Japan, with 10%.

The industry can't cite a single objective study that supports its contentions that the tax will suppress innovation in the field and make U.S. manufacturers globally uncompetitive. When I asked AdvaMed for the best research, here's what I got: two studies commissioned by AdvaMed itself, including the Furchtgott-Roths'; and four from libertarian or anti-tax organizations — the Pacific Research Institute, the National Center for Policy Analysis, the Business Roundtable, and the Heritage Foundation. The last of these was largely based on the NCPA paper and a quote from an AdvaMed official. The polite term for that is a "daisy chain."

That doesn't mean, by itself, that those anti-screeds are wrong as they apply to the medical device tax; just that if you ever found a study from any of them endorsing a tax of almost any variety, you could be forgiven for fainting dead away.

As for the tax undermining research and development, the Furchtgott-Roth paper observed that "ninety-five percent of American device firms have sales of less than $100 million," as if to suggest that the industry teeters on the knife-edge of profitability and this burden will push it over.

But that's only part of the story. Most of the business belongs to a handful of mega-firms such as Johnson & Johnson; a study by a Massachusetts industry journal calculated that nearly 90% of the tax would be paid by the 10 biggest companies, all of which had revenues of about $2 billion or more in 2009.

The biggest problem with the industry's position is that it offers no substitute for the $3 billion a year in taxes it wants to shed. "We're looking to Congress to replace the revenue and if so, how," AdvaMed's Scott told me. "The ball's not really in our court."

Yet blowing a funding hole in a major program and then claiming that, as far as solutions go, "the ball's not really in our court" is the antithesis of responsible participation in the policymaking process. That's especially so given that the money the industry doesn't wish to pay would likely have to be made up by other stakeholders. None of them would be overjoyed at the prospect.

Do the device makers really think they can open a big fiscal wound like this and walk away from the political carnage? Well, yes.

The March Senate vote provided proof — with a vengeance — of the old adage that "all politics is local." Many of those Democratic votes for repeal came from states where medical device makers swing a big stick. Minnesota and Massachusetts are the second- and fourth-largest states, by employment, for the industry, which accounted for more than 1% of Minnesota's entire state gross domestic product and a sizable half of 1% for Massachusetts.

Interestingly, both Democratic senators from California, the top-ranking state by industry employment, voted against repeal. That may reflect how the industry's 13,000 California workers account for about seven-tenths of 1% of state employment and its output barely one-fourth of a percent of state GDP. Its relatively modest footprint statewide arguably allowed them to see past parochial concerns and look at the big picture.

The industry is pushing hard for special treatment. It's been spending a handsome $30 million a year on Washington lobbying, on top of about $10 million a year in campaign donations. Klobuchar, Franken, Warren and California Sens. Dianne Feinstein and Barbara Boxer are all on its gift list, so the chances that it will slink away into the night are nil.

But if it wins this battle, it will be because it has spread political money and political influence around, not because of its sound substantial arguments. It doesn't have those.

Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.

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